Energy Policy Forumhttp://energypolicyforum.com
Spot Trends, Don't FollowSun, 29 Mar 2015 17:17:25 +0000en-UShourly1http://wordpress.org/?v=4.1.1Just Who Are These Investors in Shales?http://energypolicyforum.com/2015/03/29/just-who-are-these-investors-in-shales/
http://energypolicyforum.com/2015/03/29/just-who-are-these-investors-in-shales/#respondSun, 29 Mar 2015 17:17:25 +0000http://energypolicyforum.com/?p=1443By Deborah Lawrence Issuing additional shares of stock is a very expensive, and less than ideal, way for a company to get money. And yet, shale companies are issuing new shares at the fastest rate in more than a decade. The first three months of 2015 have seen about $8B in new issuance. But the […]

Issuing additional shares of stock is a very expensive, and less than ideal, way for a company to get money. And yet, shale companies are issuing new shares at the fastest rate in more than a decade. The first three months of 2015 have seen about $8B in new issuance. But the market appears aberrant. Investors are pouring money into crude ETF’s while the largest producer in the Bakken cannot find a buyer for their assets. So what’s going on?

In a recent Bloomberg Business piece, Troy Eckard of Eckard Global LLC which has interests in the Bakken, had this to say:

“Equity does not have to be paid back and requires no disbursements of revenue and net profits…it buys into your plan and works for companies that can make it through the downturn in commodity prices.”

Really?

It is also the most expensive form of capital and therefore begs the question as to why companies are using it. The answer is that they don’t have any other options.

High yield energy debt has exploded in the past few years with energy being the biggest sector of the junk debt market. Now crude prices have plunged, company asset valuations have suffered and banks are moving in to shore up balance sheets after a binge of spending on wells that may have produced a lot of hydrocarbon but very little cash flow. And that was when oil was trading around $100.

So who is buying up all this equity?

Christian O’Neill, an energy analyst with T. Rowe Price International, states to Bloomberg:

“Investors are coming to the table in the belief they are buying in at the bottom of the market and will reap gains in the long-term as oil prices recover”.

This is an interesting statement. Who are these investors? Are they large institutional investors, private equity or are they small Mom and Pop investors? It matters.

For instance, private equity has been hammered by the oil and gas sector in the past six months. In the last quarter of 2014, Carlyle’s profit declined about 68%; Apollo saw losses of about 79%; and KKR got smashed at 94%. Some private equity money went back into the market in early 2015 and losses are mounting again.

Just two weeks ago, Whiting Petroleum, the largest producer in the Bakken shale of North Dakota put itself on the sale block. Whiting had bought Kodiak last summer saddling itself with about $2B of additional debt. They closed the deal in December. Now they can’t pay for it. But within ten days of their sale announcement, it became clear that no one was interested in buying Whiting. Interestingly, the private equity boys have been boasting of the billions they have amassed for distressed oil and gas assets. And yet, they didn’t step up to the plate. Neither did Exxon Mobil. Rex Tillerson, CEO of Exxon, has been vocal about his interest in buying up assets too. Either of these entities could easily have purchased the largest producer in the Bakken. But they didn’t. So Whiting had no choice but to beg for money in the equity markets. Their stock fell 22% on the announcement.

Many shale companies still have hedges in place which will protect pricing for about another 3-5 months. As hedges roll off, however, cash flow distress will set in. The picture is complicated too by the fact that many of these operators are continuing to overproduce into a glutted market because they have to meet debt service. This, too, will keep downward pressure on prices. In other words, we are not anywhere near the bottom yet. This explains why none of the more sophisticated investors stepped up to buy Whiting because Whiting will almost certainly be cheaper about 6-8 months from now.

Now we get to the the small unsophisticated investor, Mom and Pop. They have been deliriously leaping into the largest crude oil ETF over the past few months driving shares in that fund to record highs. Investors buy into such funds thinking, erroneously, that they are a good way to “play” the crude market. But it is more complicated than that. Further, many analysts think that the “stabilization” in crude prices that we are seeing is largely due to this mass influx into oil ETF’s. But crude prices will almost certainly fall from here. The fundamentals just aren’t there.

There is a wonderful market term called contango which means that the current futures price of an asset is higher than the current spot price. The oil market is currently in contango. In fact contango has widened the most since the economic downturn of 2008. This can present unique problems as investors “roll out” of one futures contract into another. Speculators have recognized that they can buy oil today and store it to sell at a future date when prices are higher. Oil traders are storing crude anywhere they can find space. Onshore storage is expected to tap out in June. They are even using off shore storage by booking tankers full of oil to just sit and wait. As this happens, it produces a scenario of what is called negative roll yield which is currently about -9%, a very high level. This essentially means that investors can get caught in an unfavorable squeeze particularly if they are long a position. These small investors in oil ETF’s and mutual funds are long right now which means they are potentially staring down the barrel of a financial gun. Not a good place to be.

Goldman Sachs recently commented in an investor note:

“We believe that the key force pushing commodity markets higher has been retail investor inflows into oil ETF’s…Despite inflows to oil ETFs the trough is yet to come.”

Which means we haven’t seen the bottom for oil prices. But the fact that so many unsophisticated investors are pouring into ETF’s while the larger more sophisticated investors are sitting on the sidelines is a classic sign that the market is about to move south. So smaller investors may end up with losses akin to their private equity peers. The only difference being that it really is their money.

]]>http://energypolicyforum.com/2015/03/29/just-who-are-these-investors-in-shales/feed/0Podcast: Energy: 24/7: EVs plus Solar equals Disruptionhttp://energypolicyforum.com/2015/03/26/podcast-energy-247-evs-plus-solar-equals-disruption/
http://energypolicyforum.com/2015/03/26/podcast-energy-247-evs-plus-solar-equals-disruption/#respondThu, 26 Mar 2015 23:21:33 +0000http://energypolicyforum.com/?p=1438Prior to Tesla, when we thought of electric vehicles (EVs) it often conjured up images of Jetson flying cars or funky looking contraptions that were really glorified golf carts. They were anomalies that might have made you smile when someone drove past. That is not the case anymore. Tesla took care of that once and […]

]]>Prior to Tesla, when we thought of electric vehicles (EVs) it often conjured up images of Jetson flying cars or funky looking contraptions that were really glorified golf carts. They were anomalies that might have made you smile when someone drove past. That is not the case anymore. Tesla took care of that once and for all. We now have a sexy, powerful automobile with zero emissions that will take your breath away the moment you touch the accelerator.

They also cost $100K and are clearly out of reach for most of us.

There is, however, an underlying current which is swelling and could potentially disrupt the transportation markets and thereby strand crude oil assets. No, we are not all going to get super wealthy and be able to buy a Tesla. Tesla will come to us. So will BMW…and Google. Listen for all the details…

]]>http://energypolicyforum.com/2015/03/26/podcast-energy-247-evs-plus-solar-equals-disruption/feed/0Slides: Shales 101: A Failed Business Model?http://energypolicyforum.com/2015/03/24/slides-shales-101-a-failed-business-model/
http://energypolicyforum.com/2015/03/24/slides-shales-101-a-failed-business-model/#respondTue, 24 Mar 2015 23:25:36 +0000http://energypolicyforum.com/?p=1425Want to learn more about shales? Start here with this slide deck and see why the shale business model faces so many hurdles.

]]>http://energypolicyforum.com/2015/03/24/slides-shales-101-a-failed-business-model/feed/0The Shale Debt Reduxhttp://energypolicyforum.com/2015/03/23/the-shale-debt-redux/
http://energypolicyforum.com/2015/03/23/the-shale-debt-redux/#respondMon, 23 Mar 2015 20:09:25 +0000http://energypolicyforum.com/?p=1418By Deborah Lawrence Shale debt, falling prices and slack demand has tight oil producers in trouble. And yet, there is still burgeoning production. Why? Well, we’ve seen this before. It’s the shale debt redux. Operators did it a few years ago in natural gas and prices have yet to recover. Unfortunately cheap money in the […]

Shale debt, falling prices and slack demand has tight oil producers in trouble. And yet, there is still burgeoning production. Why? Well, we’ve seen this before. It’s the shale debt redux. Operators did it a few years ago in natural gas and prices have yet to recover. Unfortunately cheap money in the form of debt can mean poor investment choices for businesses and for investors. But it can also lead to an aberrant market because operators deep in debt won’t curtail production even though it is glutted. Debt coupons simply have to be met.

The shale revolution has always been funded by massive debt. Operators who were drilling for gas back in 2009-2011 used debt extensively. And just like now, they overproduced. By 2011, supply exceeded demand by four times. Then prices tanked. It is curious that so few asked the questions: why did they produce so heavily and glut the market; and why did they continue to produce into a glutted market? The answer is really quite simple. Many couldn’t afford to pull back production to help stabilize prices. Had they done so, they would not have been able to meet their debt payments. So they kept pumping…and pumping…and pumping.

And now they’ve done it again.

When interest rates are kept artificially low for extended periods of time, investors and businesses begin to take risks. They invest in stocks and high yield bonds, or they issue debt to get more money. In a normal functioning market such investments might not have been considered because reasonable returns would be available in more conservative areas. Some analysts argue that low interest rates encourage bubbles because investors begin chasing the most hyped sectors thinking they will get a better return. And nothing has been more hyped than shales. Low interest rates did indeed create the perfect environment for taking on heavy debt loads by companies and increasing the appetite on the part of investors for junk debt. Neither scenario, however, is ideal. Both can put you behind the eight ball very quickly.

Much of the debt issued by shale operators has been high yield or what is commonly referred to as junk. According to the Wall Street Journal:

“Junk bonds have financed the U.S. shale boom, and now the sharp drop in oil prices could lead to a massive wave of defaults on that high-yield debt.”

JP Morgan Chase estimates that as much as 40% of this junk debt may be defaulted on by shale companies in the next two years if prices stay below $65/bbl. Yeah, you read that right…40%! Prices are currently trading around $45/bbl and operators are still pumping huge amounts of crude into the market so a $20/bbl price rise would seem unlikely.

This picture is complicated enormously by the overwhelming need for cash by shale operators. Energy was the fastest growing sector of junk debt in 2014 and is the largest chunk of the high yield market. Energy junk debt rose from about 14% at YE 2013 to 19% by YE 2014. Prices began tanking, however, in 2014 driving up the yields on these bonds to nosebleed heights. Some big investors took a risk in early 2015 and started buying up this distressed paper. Unfortunately, the markets turned against them again and losses are mounting. According to Oil Price:

“The high-yield debt market is being overrun by the energy industry. High-yield energy debt has swelled from just $65.6 billion in 2007 up to $201 billion today. That is a result of shaky drillers turning to debt markets more and more to stay afloat, as well as once-stable companies getting downgraded into junk territory. Yields on junk energy debt have hit 7.44 percent over government bonds, more than double the rate from June 2014.”

The shale monster eats cash for breakfast, lunch and dinner. Desperate for cash, operators are now turning to equity issuance in addition to their mountains of shale debt to fund operations. Equity is the most expensive form of cash because it dilutes existing shareholders. Many, however, no longer have access to more debt having maxed out their ratios. So energy equity issuance has exploded in 2015 growing at the fastest clip in a decade. Approximately $8B in new equity was issued in the first quarter 2015 though prices continue to fall and shares are being hammered. Further, large investment banks have been left with rotting shale debt on their books that they can’t unload. A recent transaction saw these loans picked up at 65 cents on the dollar.

The shale debt redux is yet another indication that this business model has problems. The shale game cannot be kept going without continuous and breathtaking amounts of cash. Kepler Chevreux recently stated that US shale and Canadian oil sands account for about 18% of global production. They also account for approximately 50% of global CAPEX. So if shales and oil sands really are our energy panaceas, then hold on because prices are going through the roof for anything using crude or natural gas in the coming decades. Costs have simply gotten too high and there is no reason to think that they will abate.

So those non-OECD countries that are choosing to leapfrog hydrocarbons and spend their money on renewable infrastructure may certainly be on to something. With hydrocarbon costs skyrocketing, can the U.S. really afford to be dependent on oil and gas for decades to come? Because it sure would be nice to have energy without fuel costs.

]]>http://energypolicyforum.com/2015/03/23/the-shale-debt-redux/feed/0Podcast: Energy 24/7 The Shale Revolution A Bust for Investorshttp://energypolicyforum.com/2015/03/21/podcast-energy-247-the-shale-revolution-a-bust-for-investors/
http://energypolicyforum.com/2015/03/21/podcast-energy-247-the-shale-revolution-a-bust-for-investors/#respondSat, 21 Mar 2015 15:36:35 +0000http://energypolicyforum.com/?p=1415Shale companies which are considered the best and brightest in their plays have provided dismal returns for shareholders for the most part. The latest podcast from energy 24/7.

]]>http://energypolicyforum.com/2015/03/21/podcast-energy-247-the-shale-revolution-a-bust-for-investors/feed/0Rethink the Grid: Personal Power Stationshttp://energypolicyforum.com/2015/03/15/rethink-the-grid-personal-power-stations/
http://energypolicyforum.com/2015/03/15/rethink-the-grid-personal-power-stations/#respondSun, 15 Mar 2015 15:30:57 +0000http://energypolicyforum.com/?p=1411By Deborah Lawrence Rethinking the grid is quickly emerging as one of the hottest topics. The concept of our own personal power stations can be seductive…and just might save us a whole lot of money too. “Get big or get out!” Those were the famous, and controversial, words of Earl Butz, Secretary of Agriculture in […]

Rethinking the grid is quickly emerging as one of the hottest topics. The concept of our own personal power stations can be seductive…and just might save us a whole lot of money too.

“Get big or get out!” Those were the famous, and controversial, words of Earl Butz, Secretary of Agriculture in the seventies. Considering the combination of renewable technology and battery storage, a new popular mantra may emerge: get small and be free.

Much ado about all things renewable together with the objections that technologies can never fully replace fossil fuel generation is popular among a certain set. Here in Texas, among arch conservatives, Solyndra lives on…and on…and on. But the truth is that Solyndra is ancient history. New technologies are ramping up and have been highly successful and may change the way we use the grid forever. Perhaps most interesting of all, however, is the way in which new ways to think about the grid and electricity are prompting entrepreneurs worldwide to rethink, remake and reuse. For instance, what if we all had the ability to transform our homes into micro personal power stations?

The grid is an interesting beast. It typically operates using several different power options together with some back up reserve. Oddly, it runs with virtually zero storage capacity because large amounts of electricity are difficult to store. So nobody really addressed that problem. Until now.

What if we decided to think outside our box and imagine that instead of myriad wires joining each of our houses, there were solar panels on the roof. These in turn pumped electricity into an array of batteries in our garages next to the work bench. Or into our EV which could also act as a storage vehicle. No pun intended.

Large scale storage is a problem because it is large scale. The needs of a utility are vastly different than the needs of an individual home. So tackling the problem of storage would seem to make the most sense if done on a small scale. GTM Research expects home battery storage to grow into a billion dollar a year money generator by 2018. That’s only three years away. Solar City, a large solar installer, is already offering battery storage for home use. They describe their system as:

“…a cost-effective, wall-mounted storage appliance that is small, powerful and covered by a long lasting full 10 year warranty.”

So our homes become a micro-grid. Having said all this, there will still be a need for large scale utility generation. Industrial users for instance would probably be better off using the grid system. This is where the larger scale storage solutions currently being tried and offered are coming into their own.

Electricity supply is never constant. It fluctuates throughout the day. To use renewable energy on a large scale, battery storage is needed. While lithium ion batteries have taken center stage, other less sexy technologies are being employed with success. If lithium ion batteries are the Tesla’s of the energy storage world, then flow batteries are the pick up trucks: hard working and reliable. Lead acid batteries too are gaining traction. All of these technologies perform different functions which are critical to grid reliability.

“Flow batteries have been shown to excel at long-duration energy storage applications and advanced lead-acid batteries have proven to be excellent performers in power-intensive applications.”

Further, these markets are expected to grow quickly. Navigant forecasts:

“…the annual revenue of cell sales for advanced batteries for utility-scale applications will grow from $221.8 million in 2014 to $17.8 billion in 2023.”

And equally interesting, Navigant projects:

“…the annual energy capacity of advanced batteries for utility-scale energy storage applications will grow from 412 megawatt-hours (MWh) in 2014 to more than 51,200 MWh in 2023, at a compound annual growth rate of 71 percent.”

Other aspects of storage are also being proactively addressed. One of the most common arguments heard is “what do we do with the spent automotive batteries”? Interestingly enough, BMW, and others, are working on that. Apparently an EV battery can have as much as 70% of its storage capacity still intact after its automotive life. So BMW has partnered up with Bosch and Vattenfall, a Swedish company, to repurpose used battery packs into grid storage. Home storage is also a possibility. So rethink, remake and reuse is really happening.

Another example of rethink is the recent announcement by Nissan that they have entered into a deal with Endesa, a Spanish utility behemoth. This arrangement would allow motorists to sell the unused power stored in their EV’s back to the grid. Such access to additional power could potentially provide extra stability for the utility and thereby the grid.

The grid doesn’t have to be run the way it has always been run. We can innovate. And innovation is precisely what is occurring. Perhaps the most important “rethink” of all is in our own heads as we learn to open our minds to using the grid in a whole new way.

]]>http://energypolicyforum.com/2015/03/12/podcast-energy-247-2/feed/0Money and Policy Now Support Renewableshttp://energypolicyforum.com/2015/03/10/money-and-policy-now-support-renewables/
http://energypolicyforum.com/2015/03/10/money-and-policy-now-support-renewables/#respondTue, 10 Mar 2015 15:07:57 +0000http://energypolicyforum.com/?p=1379By Deborah Lawrence Money and energy policy don’t always walk hand in hand unless, of course, it is in the form of campaign contributions. The year 2015, however, may turn out to be the year energy policy for renewables finally commits to the financial sector. And like all great commitments or marriages, it will have […]

Money and energy policy don’t always walk hand in hand unless, of course, it is in the form of campaign contributions. The year 2015, however, may turn out to be the year energy policy for renewables finally commits to the financial sector. And like all great commitments or marriages, it will have its ups and downs, its laughs and its tears. But one thing is certain. It’s gonna be interesting.

Ernst and Young, a preeminent, big accounting firm issued a report in March 2015 which proclaims:

“The public and private sectors are both committing significant sums to fund ambitious capacity programs and large-scale projects, while policy signals are becoming increasingly positive in many markets.”

This is one of the most interesting aspects emerging in the new energy economy: the nexus between money and policy with momentum building. A recent report issued by the National Bank of Abu Dhabi titled “Financing the Future of Energy” states:

“Governments all over the world…are setting ambitions and shaping strategies to respond to climate change and decarbonise their economies. Because of the sheer level of investment needed to deliver on those strategies, there is a major role for the private sector, especially the finance sector, to play in enabling Governments to make those policy ambitions a reality.”

This same nexus was seen in the joint announcement between the U.S. and China in November 2014 with regard to the new energy economy. Not only was it unprecedented for the two largest emitters of carbon to pledge lower emissions, it was also ambitious. While some naysayers criticized China’s pledge as not doing enough, it is worth putting their pledge in perspective. According to the White House press release:

“China’s target to expand total energy consumption coming from zero-emission sources to around 20 percent by 2030 is notable. It will require China to deploy an additional 800-1,000 gigawatts of nuclear, wind, solar and other zero emission generation capacity by 2030 – more than all the coal-fired power plants that exist in China today and close to total current electricity generation capacity in the United States.”

China’s commitment is to bring online close to the total capacity of the current US grid using primarily renewable sources in a mere 15 years!

India, too, has announced that they wish to be a global renewable leader. In fact, they have pledged to be diesel generator free 24/7 by 2019. That’s right…2019. Prime Minister Modi has set an ambitious target of $100B for renewable projects and solar in particular. In an interview with Ernst and Young, Piyash Goyal, Indian Minister of Power, Coal and New and Renewable Energy stated:

“We’re also bringing in some very bankable purchasers of the solar power. So we’ll have companies with a AAA rating becoming solar power offtakers through a transparent bidding process, which will give comfort both to bankers putting money into the business and to investors, in terms of transparency and reduced risk of future cancellations.”

The day before the budget was set for 2015, India released its Economic Survey which projected as much as $160B of potential business for India’s renewables sector over the next five years. Further, it is interesting to note that India intends to leapfrog hydrocarbons to a large extent. The Survey stated:

“…we have an opportunity to avoid excessive dependence on fossil-fuel-based energy systems and carbon lock-ins that many industrialised countries face today”.

This sort of realization is occurring throughout non-OECD countries. Why spend billions on building infrastructure for hydrocarbons and lock yourself in to future fuel costs when renewable technology can be employed and avoid fuel costs altogether?

Egypt, too, has pledged ambitious targets. A recent solar energy tender was oversubscribed twice over. The fact that all that excess sunshine Egypt receives can be exported in the form of energy proved alluring. Investors committed.

This unprecedented level of projected growth has to be financed. And to do that investors need clear signals that policy will support their investment. And perhaps for the first time, they are receiving just such signals from governments globally. John Podesta, former advisor to President Obama on climate and energy, stated in March 2015:

“The combination of those two big economies [China and America] making big investments in renewable energy is going to drive cost down and drive clean energy production up. So I think that is a very positive market signal that clean energy is the future.”

Things are changing. And changing fast. You know you are operating in another realm or perhaps a parallel universe when the National Bank of one of the Gulf States, Abu Dhabi, states:

“While the economies of this region have been built on oil and gas production, and that will continue for the foreseeable future, the energy system of the past will not be the same as the energy system for the future. It is clear that renewables will be an established and significant part of the future energy mix, in the region and globally.”

Given the inherent need to address climate change, a marriage of money and policy supporting a global renewable energy build out is welcome and much needed.

]]>http://energypolicyforum.com/2015/03/10/money-and-policy-now-support-renewables/feed/0EV’s plus Solar equals Disruptionhttp://energypolicyforum.com/2015/03/05/evs-plus-solar-equals-disruption/
http://energypolicyforum.com/2015/03/05/evs-plus-solar-equals-disruption/#respondThu, 05 Mar 2015 18:59:59 +0000http://energypolicyforum.com/?p=1360By Deborah Lawrence Prior to Tesla, when we thought of electric vehicles (EV’s) it often conjured up images of Jetson flying cars or funky looking contraptions that were really glorified golf carts. They were anomalies that might have made you smile when someone drove past. That is not the case anymore. Tesla took care of […]

Prior to Tesla, when we thought of electric vehicles (EV’s) it often conjured up images of Jetson flying cars or funky looking contraptions that were really glorified golf carts. They were anomalies that might have made you smile when someone drove past. That is not the case anymore. Tesla took care of that once and for all. We now have a sexy, powerful automobile with zero emissions that will take your breath away the moment you touch the accelerator.

They also cost $100K and are clearly out of reach for most of us.

There is, however, an underlying current which is swelling and could potentially disrupt the transportation markets and thereby strand crude oil assets. No, we are not all going to get super wealthy and be able to buy a Tesla. Tesla will come to us. So will BMW…and Google.

A great deal of speculation is occurring at the moment about Google’s self drive car, the possibility of Apple entering the auto market and the fact that in August 2014 BMW sold more electric cars than Tesla. So why are all these large companies suddenly so interested in the electric vehicle market? It is really quite simple. Potential growth and thereby potential profit.

Coal and natural gas have traditionally been the power source for electricity generation. Now, however, wind and solar are cost competitive with both coal and nat gas in many parts of the world. Moreover, solar costs are expected to drop by half in the next 18-24 months which will open solar up to significant new market share. That means power generation costs will be cheapest if we use renewable energy which in turn makes hydrocarbons the high cost alternative. A notion which is mind boggling in itself.

And there’s more.

Electric vehicles (EV) are already cheaper to run than internal combustion engines. For instance, before the drop in crude prices, it cost about 15 cents/mile to drive a gasoline powered car as opposed to about 4 cents/mile for an EV. Now crude has plunged approximately 50%. Still it is cheaper to drive an EV. Further, while EV’s are expensive to build because of the currently high cost of the batteries, the costs here too are expected to fall precipitously over the next few years making an EV potentially cheaper than an internal combustion engine to build. And all of this is expected to occur in less than ten years.

And there is still more.

Tesla recently announced home batteries. This will allow us to store energy from our roof top solar panels for use later. But roof top solar combined with home batteries combined with EV’s means cheaper electricity, cheaper transportation and the ability to make each of our homes a virtual power station. All of these technologies feed off one another and make a symbiotic whole or what economists refer to as a virtuous circle.

“Our proprietary model shows it is the combination of the three that makes solar fully competitive and that has the potential to bring disruptive changes to the electricity sector. Here are the maths: One can leverage the EV purchase with an investment in a solar system and a stationary battery. By doing so, one can optimise the self-consumption of solar power and minimise the “excess waste” of solar electricity…The combination of an EV + solar + battery should have a payback of 7-11 years, depending on the country-specific economics. In other words, based on a 20-year technical life of a solar system, a…buyer should receive 12 years of electricity for free (purchase in 2020).”

This model would, of course, be highly disruptive for crude oil used in transportation. And it is all based on simple economics that state it will be cheaper for us to use renewable electricity to power our homes and power our cars. The added benefit is low to zero carbon emissions. Please note also that there has been no mention of climate change and draconian forced regulation. It is simply more cost effective for us to change. And again, both wind and solar and EV’s are already competitive with the status quo but none of the these new technologies have yet reached scale. Costs will plunge when they do making these scenarios even more likely and more competitive.

]]>http://energypolicyforum.com/2015/03/05/evs-plus-solar-equals-disruption/feed/0Stranded Assets in Oil and Gas a Realityhttp://energypolicyforum.com/2015/03/03/stranded-assets-in-oil-and-gas-a-reality/
http://energypolicyforum.com/2015/03/03/stranded-assets-in-oil-and-gas-a-reality/#respondTue, 03 Mar 2015 15:19:04 +0000http://www.energypolicyforum.com/?p=1349By Deborah Lawrence Just a few short years ago a friend called me to chat about the possibility of stranded assets in oil and gas due to climate change and the expected legislation and new regulations that would entail. This was an interesting idea coming out of the UK at the time. Since then, the […]

Just a few short years ago a friend called me to chat about the possibility of stranded assets in oil and gas due to climate change and the expected legislation and new regulations that would entail. This was an interesting idea coming out of the UK at the time. Since then, the idea has gained more and more traction. What is starting to emerge, however, is that stranded assets in oil and gas are not going to happen merely because of climate change. It is happening as we speak because a number of potentially disrupting events are all converging on one point: our use of hydrocarbons. Some of the challenges are due to climate and some are not. What is clear, however, is that they are multiplying. Though climate change will no doubt prove to be one aspect of stranded assets, others will include a simple but powerful realization that there are simply better places to put your investment dollars…or euros…or yuan.

So what are these potentially disrupting events? Let’s start with just one.

We’ve all heard of the compound effect and how it can beneficially impact our investments. What we don’t hear as much is what it can do detrimentally as well. Because the compound effect doesn’t just work on investments. It also works on every aspect of your life. If you choose to add desserts to a couple of meals a week when you never ate dessert before, chances are that you will gain weight. It won’t seem a big deal at first. You won’t even notice it but then one day you will wake up and “somehow” you’ve gained five pounds. Something similar is happening with the alternative energies of wind and solar. While most of us were not paying attention, they were quietly adding capacity to the grid. While we were incessantly fixated on the “shale revolution” they were streamlining manufacturing processes and the costs were plunging. Even now there are those oil and gas apologists who knowingly smile and make smug pronouncements about wind and solar only accounting for a minuscule part of the overall system…and to some extent they are right. But what they have not realized is that even though the alternative energies are currently a small portion of the overall grid, they are already economically competitive! In fact, wind is now the cheapest form of electricity generation in the US and many other places globally on a levelized basis. And yes, this is without subsidies. Solar is expected to be competitive with wind in the next 18 months to two years and yet, these technologies have not reached scale. Imagine the possibilities then. UBS in a March research note stated:

“Solar is no longer necessarily an ‘alternative’ energy – and we expect the investor base to reflect this in the coming year.”

First Solar and SunPower recently announced a joint yieldco and investors were so enthusiastic that both stocks surged 10% and 18% respectively. A yieldco is a new form of investment vehicle which is essentially the alternative energy industry’s equivalent of a Master Limited Partnership which oil and gas uses extensively. Instead of selling off their solar assets to power providers which has been the typical model in the past, these solar companies will now keep them on their books. Why would this be attractive to investors? Because the proposed solar plants could generate as much as $2.8B over their life time. Further, Bloomberg calls it a “low risk opportunity for investors”.

Once investment potential is truly recognized in these new energy producers, as is happening currently, much more money becomes available. The fact that both wind and solar are already competitive with natural gas and coal fired generation will make the dynamics change very quickly. That is when the tipping point is reached and assets that once supported oil and gas and coal will shift into supporting wind and solar. There are good indications that this has already been occurring given the poor share performance of shale companies during the shale revolution and the dismal outlook for coal. Most of the top shale operators in the very best plays have not been able to match the returns of the S&P 500 index and solar shares have often outdistanced them by multiples.

So hang on for the ride. We appear to be entering a new era of wealth creation. And stranded assets in oil and gas could truly become the next Kodak moment.